Why Should Startups Track Metrics?
Please have a seat, Dr. Founder. Let’s discuss some general advice that you need to keep in mind when launching and running that billion-dollar startup. I’m sure your mind is racing from product-market fit to agile to customer focus among others—all worthy pursuits. But an often overlooked practice is building a financial model and using it regularly to track your metrics.
Here’s what we will talk about in this post:
- Reasons why you should track your metrics early
- Reasons people usually cite for not tracking their startup’s metrics
Let’s dive into the reasons why it’s important to track your startup’s metrics.
- Fundraising and investor management
- Ten Degrees of Separation
- Problem Identification
- Problem Measurement and Prioritization
1. Fundraising and investor management
Entrepreneurs make a financial model when they have to raise funds. And update it when they have to raise more funds. While that’s definitely a hyperbole, fundraising continues to be one of the top use-cases for a financial model. Investors always need a rigorous financial model in a deck.
And it doesn’t stop there—having an updated financial model makes it much easier to share regular updates with investors. Regular communication with your existing investors is important to keep them warm for future rounds.
2. Ten Degrees of Separation
Let’s say you’re headed in the wrong direction. By 10 degrees. This can have materially different implications depending on how much further you have to walk. If you go wrong at the beginning, you’ll end up much farther away from where you wanted to be. If you go wrong towards the end, the cost to course-correct will be lower.
That’s why it is even more important to be on top of your metrics right at the beginning so that you can make the necessary adjustments early.
3. Problem Identification
There are multiple levers that you can pull to influence the health of your business. Choosing which ones to pull often starts with the question, “What’s wrong?”. This identification of the problem is aided by tracking your startup’s metrics.
E.g., If your startup’s growth has been lukewarm, it could be due to multiple reasons. Perhaps the growth in gross revenue is not strong enough. Perhaps new customers are coming in at a strong pace but also churning out really fast. There could be other reasons too. Now if the problem really is churn and you end up increasing your marketing budget, then you won’t see the desired results. Thus it is important to track your metrics to answer the “What” in the problem.
4. Problem Measurement and Prioritization
Once you have identified the “What”, the next step is to measure it or answer the “How much” question. This again becomes easier if you have a regular system of tracking the metrics.
Next, how will you prioritize the areas that have issues? This is the “When” question and it involves a subjective assessment of the problems that have been identified and measured. It also depends on the answer to the “How much” question and on the criticality of specific metrics to your type of business.
Alright, so it seems like there are legit reasons to start tracking your metrics at an early stage. But then why don’t people do it often? Let’s acknowledge some common reasons.
- I want to focus on Product.
- I’m not finance-savvy enough.
- I don’t have data.
- Confirmation Bias
1. I want to focus on Product.
In terms of the first point, we’ve already discussed four reasons why it’s important to focus on metrics in addition to focusing on product.
2. I’m not finance-savvy enough.
While there is definitely a learning curve to financial modeling, there are workarounds to speed up the process. There are readily available spreadsheet templates online that will allow you to model your business. The quality of templates varies and many don’t fit your business, but they are a good place to start. If you want something even simpler and free from inherent spreadsheet issues, then you can try SaaS tools such as Finmark. In a nutshell, you don’t need to be a finance guru to start tracking your metrics.
3. I don’t have data.
While it is true that availability of data is limited initially, there are still enough data points to track certain metrics. E.g., MRR and growth. Moreover, in the initial days, the focus should be more on direction than accuracy. With time, as more data becomes available, you can start to track more numbers of metrics with a higher accuracy.
4. Confirmation Bias
This is an interesting piece of founder psychology. Launching a startup is no mean task and it’s rough in the initial days. Amidst finding the initial customers and the general uncertainty of a startup, any piece of good news is welcome because it validates the belief that things are looking up. This sometimes leads to founders tracking only those metrics that bring this positive news. E.g., there may be high growth in new customers accompanied by high churn. Unless there’s a system to holistically track different metrics, founders may fall into the trap of tracking only growth in new customers, thus ignoring a serious problem that could compound if left unchecked.
The merits of tracking your metrics early are abundantly clear. So are the costs of not tracking them. It may not be the most glamorous part of being a founder, but one that’s necessary for long term startup health.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.